Nothing the coalition does will matter more than how it deals with welfare reform. People in work may be upset about taxes, pensions or services; but life will go on. The economic outlook for most people over the next year or two is a greyer, more pinched, tougher version of how things are already. For people out of work, it's a different story. Real hardship beckons. Families will be forced to move house. This isn't about the "high street". It's about having enough pennies.

Iain Duncan Smith, who is expected to launch his plans for welfare reform this week, is no Norman Tebbit. He is a fundamentally kind man, passionate about the downward spiral caused by worklessness, who has spent years thinking about reform. He has shamed his colleagues into giving him a little more money upfront for welfare reform. He has come up with genuinely radical-looking ideas, above all the single pension as well as the universal benefit.

So what are we to make of the latest idea, that "layabouts" or "the workshy" will lose benefits unless they take compulsory full-time work for the community? The first thing to say is that the numbers are huge. It affects in theory 1.4 million people on jobseekers' allowance and is separate from the campaign to get 1 million of the 2.6 million claiming incapacity benefit back to work. If the government is serious, this will change the look and feel of Britain. It will mean huge numbers of people doing compulsory work, presumably cleaning streets, helping in residential homes, scrubbing graffiti and so on. And all at the same time as a crackdown on housing benefit.

Instead of howls of Labour outrage, there has been an nuanced response from Douglas Alexander, the shadow work and pensions secretary. He effectively admits that in government Labour moved too slowly to reform incapacity benefit and let housing benefit take too much of the strain. He supports the broad principle of a universal benefit, and of reforming incapacity benefit. But he's waiting to see the detail. Today Harriet Harman declined to wade in aggressively, again wait-and-seeing.

This reflects a simple truth. If money cannot be shaved off the welfare system, and politicians are determined to protect the NHS and schools, then there is no credible plan for dealing with the deficit. Had Alexander promised outright opposition to coalition proposals then, in short order, Labour would have been pinned into much, much higher taxes (and not only for the rich) to make the books add up. As he said today: "We cannot and should not be a party that is simply against doing things." It would have been kamikaze oppositionism.

It's a mark of Alexander's seriousness that he rejects it. But it is only the first stage of a policy. Labour can be proud of getting more single parents into work, with poverty down in the Labour years, and the number of claimants halved. But these were achievements of the boom times, when overall employment was rising fast, even with most new jobs being taken by migrant workers. Times are far tougher now.

It's right to admit that in some families morale collapsed long ago, leaving two or three generations in a passive, depressed no-man's land, outside the rest of society. When IDS says he wants to help them, and feels compassion for their plight, I believe him. And when we squirm about the language of "workshy", "layabouts" and "idlers", let's be honest enough to admit it is more often the language of newspapers than MPs.

Training is something everyone should support. If it has to be done by private firms then, again, I don't think Labour should respond with kneejerk hostility. Let's see what works. Similarly, a simpler system is needed. The maze of credits and benefits had become dazing to those administering it, never mind recipients. Clarity would make it harder to cheat the system.

And if people who are unemployed can be found socially useful community work to keep them busy while they are waiting for jobs during a period of very slow economic growth – or perhaps no growth at all – then that seems fair enough. Work is habit. Getting up in the morning and turning up at the right time is a routine people can easily fall out of, or never learn. The left should never champion a welfare system which does not expect self-discipline or effort.

But here is the thing. There is all the difference in the world between measures to help people back into work – retraining, insisting on community work as a stop-gap, advising and cajoling – and humiliating people. There are idle people. To put it colloquially, some of our fellow citizens are taking the piss, not just those working for merchant banks but those living on estates. But there are many more who would like to work, who want to pay their way, and are unable to find a proper job. The coalition has been painting cartoon characters – the workshy – when in fact there are many more who are not workshy, but workless, despite their best efforts.

If there are jobs to be had, you can push people into them. If there aren't, you are just pushing them off a cliff, into depression, ridicule and despair. What happens to someone, already feeling crushed and useless because they have been sacked, and then turned down, who does not want to spend 30 hours a week in front of the neighbours, scrubbing graffiti? Will they be watched by security guards, or made to wear identifiable uniforms? If they refuse, what do ministers think they will do when their benefits are cut off for three months? Rob? Deal drugs? Beg?

These are genuine questions. If it was so easy to find and run "tough love" public works, the non-custodial sentencing schemes we have seen in recent years would have been triumphant successes. So far, the coalition's plan has made strong headlines and rhetorical points, but has not landed foursquare in the real world. Finding enough community work, supervising it, and dealing with tens of thousands of resentful people – who does all this during a time of deep cuts, and who pays? There are dozens of devils dancing in the detail. At least Labour's system, with its Flexible New Deal and Future Jobs Fund, guaranteed jobs at the end of the process: today, there are no guarantees of a real job, paid at the minimum wage, at all.

This is not about intention. It is about practicalities, and attitude. If the coalition intends to punish the workless, it will destroy itself. If it means to help them, and is ready to spend money and delay cuts to do so, it should be cheered.

The Chartered Institute of Housing reveals that if rents rise as they have historically done, then the poor will simply be priced out of many towns and cities in Britain. Instead they will be shepherded into islands of poverty in the south where housing is cheap, or into the north where there is a dearth of jobs. Within 15 years, the southern parts of the country become simply unaffordable